I’m a 70-year-old widow. I’m currently doing caring work in the UK because I need the income.
I have approximately R2.3 million which I have to live off the interest of. This is very little, so I really need a decent interest rate.
The RSA retail bonds are at 8.5% now but then one needs to tie your money up for five years. However, one can enjoy higher rates as they go up by restarting your five-year term.
I thought perhaps I should go into an income fund that performs well. I looked at the Mi-Plan Enhanced Income Fund and it looked well established and well-performing. I was in fact on the verge of investing with them but was shocked recently when the daily performance was -1.7%. It was across the board of most income funds, but I was so surprised to see that there was such a big fluctuation in a single day.
This worried me so I thought I should get some professional help before making my decision. I would be so grateful if you could help me in this regard.
Thank you for your question. Your concerns are ones that we come across on a regular basis in our industry and unfortunately, there is no ‘silver bullet’ answer to help you in your decision-making process. We find the best way to assist people in similar situations is to help them understand the risks associated with investing in the various asset classes and then, importantly, help them marry this information with their personal objectives in order to make a more educated decision.
As we do not have full insight into your personal circumstances, we are somewhat limited in how we answer this question, so our aim is to provide you with some insights for consideration and highlight potential areas of concern.
When it comes to investing for the long term, inflation can be a harmful enemy. Generally speaking, most investors need their investments to beat inflation in order to increase the purchasing power of their savings over time. Without knowing how much you need on a monthly basis to cover your living expenses, it is difficult to advise the most appropriate investment for your lump sum.
We understand that, while you are currently working and generating an income, there will come a point when you are no longer able to work and will need to rely on your invested capital. If you choose an investment strategy where your capital is locked away and you receive a fixed percentage income, this may work in the short-term but not necessarily over the longer term. This is because, as inflation goes up and your cost of living increases, the income you receive from this investment will lose value over time and will not be sufficient to cover your monthly expenses. This, in turn, will result in liquidity problems for you. In addition, you need to consider what will happen in the event of a financial emergency if your capital is tied up and inaccessible.
It is important to note that the SA Bond market has been the best performing asset class over the last five years. Having said this, remember that past performance does not necessarily predict the future, and no one really knows what is going to happen in the future.
However, if you analyse investment performance over a long enough timeline, patterns do appear – and we can use these patterns to get a better idea of what can be expected in the future.
History tells us that in the long run, investors can expect the following approximate returns from the four different asset classes:
- Cash: Inflation
- Bonds: Inflation plus 1-2%
- Property: Inflation plus 5-6%
- Equities: Inflation plus 6-7%
As you can see, cash and bonds are considered more safe and defensive asset classes, whereas property and equity would be your aggressive and growth assets classes. In theory, the more cautiously you invest, the more certainty and less volatility you have compared to the more aggressive investment options.
As you have seen from your own research though, investing isn’t as simple as just picking one. There are varying investment options available – each with its own set of risks. For example, while one might not associate an income fund with being volatile, it can be impacted negatively given certain economic situations. Tax is also an important consideration when choosing an appropriate investment, keeping in mind that each asset class creates different tax implications. Funds that invest in cash and bonds could potentially result in you paying additional income tax, whereas funds that invest in property and equities could result in you paying dividends and capital gains tax.
In closing, I wanted to share a rudimentary example of why your investment strategy is so important. Assuming you require to drawdown R15 000 per month from your R2.3 million, and that the drawdown needs to increase by inflation each year, should you invest in a fund that only targets inflation-like returns, your funds would last 12 years before being depleted. On the other hand, should you invest in a fund targeting returns of inflation plus 4.5% and it was able to achieve those targets each year, your funds would last 17 years – which is an additional five years. It is important to remember that to achieve those returns, the fund would need to have exposure to property and equities which, of course, are a lot more volatile.
My advice would be that you need to see your financial advisor to have your financial needs and situation analysed in more detail. This needs to be done so that various investment scenarios can be presented to you in order to make a better-educated decision. It is always advisable to have a portfolio that is matched to your needs, and one that sits inside your appetite for risk.